Persistence in Performance of Indian Equity Mutual Funds: An Empirical Investigation

Abstract

Persistence in performance of fund managers has been a topic of interest among finance fraternity for the last four decades. In this paper we evaluated the relative performance of equity mutual funds in India with respect to three performance indicators, and also tested the persistence in their performance with respect to these indicators across time. The performance indicators used for the funds are their raw returns, the tracking error they generate over their benchmarks, and the information ratios they attain. We find that on the whole the funds have done well. Their overall average return, tracking error and information ratio is positive during our study period. For the persistence part, we used a regression approach and a contingency table approach which showed no evidence of persistence for the ELSS funds, and some evidence of persistence for the Growth funds or all funds taken together. Our results were further substantiated with a Spearman Rank Correlation test. Another interesting finding is that evidence of persistence is more apparent over a one year evaluation horizon, compared to a time horizon either less than or more than one year. In fact persistence disappears completely when the horizon is extended to a period of time as long as thirty months or more. This gives the impression of efficiency of the market in the long run. Persistence seems to be marginally more for raw returns compared to that of tracking error or information ratio. On the whole it seems that past performance is hardly a reliable guide for future performance, particularly over a longer time horizon.